I read this guy and Mish's Economic Blogspot every day and let me run this link past you all........ surely someone else on here can explain this. Its a long post and he has graphs but maybe this will crash the stockmarket?? Your thoughts??
http://market-ticker.denninger.net/archives/622-Fiscal-Cat-5-Hurricane-Warning.html
That fact is treasury issuance.
See, to fund all this crap that Congress, Paulson and Bernanke have in the pipe (you know, the TARP, the newly-minted SIV that Ben announced this morning to buy commercial paper, etc) the treasury issue requirements will be north of three trillion dollars in this fiscal year.
Oh, and that's before Obama wins (and he will) and promises another $1 trillion worth of new spending without a nickel's worth of ability to fund it.
To put this in perspective the total amount of treasury securities owned by all foreigners at present is about $2.7 trillion.
Only a few months into this we're already requiring a crazy "tail", which is the amount of "goose" that has to be paid in order to get people to take down that debt. Its running around 20 basis points right now, and there was one disastrous auction that ran 40.
Historical norms are in the ~2-3 basis point area for off-the-run securities.
Now why does all this esoterica matter, you ask?
You've probably heard that the "IRX", or 13 week T-Bill, has come up in yield recently, and this is being touted as a clear sign that the credit markets are normalizing.
Not quite. Price and yield move in opposite directions, and when you issue a lot of short-term supply, the price goes down (supply and demand, natch), while yield goes up.
....snip....
We are rapidly reaching the point where only The Fed and Treasury are providing any lending at all!
This is insanely dangerous to economic and monetary stability; all market discipline has been removed and now we're seeing in the credit markets that which began in the equity markets with Bear Stearns.
Ben and Hank are going to produce the bond market dislocation that I have been warning about since earlier this year if he is not stopped immediately.
The base gambit is cute - force all this new Treasury issue out into the market before the election and Inauguration, when Hank is going to be replaced with someone who might not be nearly as charitable as Hank is to issuing Treasuries like a drunken sailor, and pray that the bond market tolerates his game long enough for the issue he needs to fund this abortion to clear into the marketplace.
The ugly is that there was a small inversion in LIBOR a week or so ago. That's really bad, as LIBOR normally never inverts. As Ben has played his games of late the inversion disappeared from LIBOR but moved over into the intermediate area of the US Treasury Curve, where it is far more dangerous.
China, Japan and Saudi Arabia should bring the curtain down on this farce right damn now, because Treasuries are rapidly becoming no more secure than ordinary corporate debt and the buyers sure as hell aren't being compensated for that risk.
Treasury buyers are being robbed blind along with US investors who think they're "fleeing to safety."
Nonsense; as I showed yesterday the problem is that additional debt issue no longer renders much (if any) of a positive return on GDP - no matter who issues the debt - public or private.
The ugly little secret in that graph, if you study it a bit more, is what happens when interest rates spike higher. Go back and look specifically at the period surrounding 1980, when we had sky-high inflation. Notice that we didn't get back to trendline until bond rates came down - way down - as we started having supply absorbed by Japan, China and Saudi Arabia in the 1990s and into this decade.
There is a very real risk that this Treasury Issue could force GDP return on new debt below zero. If that happens then the stability of the monetary system disappears immediately and you will see instantaneous and very large fails in the Treasury marketplace.
The consequence of this event would be catastrophic. Ben would have only two choices - print raw money, which would immediately collapse the Treasury marketplace, or get Treasury and Congress to immediately reduce issue and spending to sustainable levels.
What would "sustainable levels" be? Given that issue is running $3 trillion year-on-year, this could result in an immediate and forced cut in all federal spending by fifty percent or more as the TARP and other program money will have been spent and cannot be recalled.
Yes, you read that right. Now go look at the Federal Budget and you will find that you could eliminate all discretionary programs and all of the military and not get there. This means that in order to attain stability we would have to immediately gut Medicare and Social Security by about 50%, cut our military budget dramatically, perhaps by 25% or more, and eliminate essentially all discretionary spending - all farm subsidies, the Department of Education, Unemployment Assistance and more.
Oh, and having done that, the long end of the curve would probably still spike to 10%, which means 13-14% mortgage rates. Cut the value of every house in America in half - again - from here.
The equity markets sense this. Not one equity trader in 1,000 understands it, but they all intuitively get that something is very wrong with what has been done recently, and that what's coming is going to be very bad - perhaps ruinously bad, especially in the corporate sector where corporate debt issue is a necessity to fund operations, and not just in the short-term commercial paper markets.
Running on free cash flow alone, most corporations would make 20% of what they make today - if that much. This, of course, collapses the "E" side of the balance sheet, which means that the "P" in P/E has to come down.
Way down.
Oh, and that assumes they can take down the debt without imploding, and many of these firms will not be able to do so.
If you were wondering where I got my S&P 500 target of 500 - or perhaps worse - this is part of the computation. Its not all of it by any means, but it certainly is part of it.
There is exactly one way to stop this idiocy, and that is for the bad debt that exists out there to be forced into default and thus cleared from the system. This will cause the debt to GDP level to come down. Clearing it back to the point where a 1:1 ratio or better exists between GDP and a dollar of debt may not be possible or reasonable, but if we don't stabilize this situation - and soon - we are running the risk of literally crossing the event horizon.
Congress must act now. The fuse is about to go inside the box and once it does, you can't snip it any more. It may, in fact, already done so.
http://market-ticker.denninger.net/archives/622-Fiscal-Cat-5-Hurricane-Warning.html
That fact is treasury issuance.
See, to fund all this crap that Congress, Paulson and Bernanke have in the pipe (you know, the TARP, the newly-minted SIV that Ben announced this morning to buy commercial paper, etc) the treasury issue requirements will be north of three trillion dollars in this fiscal year.
Oh, and that's before Obama wins (and he will) and promises another $1 trillion worth of new spending without a nickel's worth of ability to fund it.
To put this in perspective the total amount of treasury securities owned by all foreigners at present is about $2.7 trillion.
Only a few months into this we're already requiring a crazy "tail", which is the amount of "goose" that has to be paid in order to get people to take down that debt. Its running around 20 basis points right now, and there was one disastrous auction that ran 40.
Historical norms are in the ~2-3 basis point area for off-the-run securities.
Now why does all this esoterica matter, you ask?
You've probably heard that the "IRX", or 13 week T-Bill, has come up in yield recently, and this is being touted as a clear sign that the credit markets are normalizing.
Not quite. Price and yield move in opposite directions, and when you issue a lot of short-term supply, the price goes down (supply and demand, natch), while yield goes up.
....snip....
We are rapidly reaching the point where only The Fed and Treasury are providing any lending at all!
This is insanely dangerous to economic and monetary stability; all market discipline has been removed and now we're seeing in the credit markets that which began in the equity markets with Bear Stearns.
Ben and Hank are going to produce the bond market dislocation that I have been warning about since earlier this year if he is not stopped immediately.
The base gambit is cute - force all this new Treasury issue out into the market before the election and Inauguration, when Hank is going to be replaced with someone who might not be nearly as charitable as Hank is to issuing Treasuries like a drunken sailor, and pray that the bond market tolerates his game long enough for the issue he needs to fund this abortion to clear into the marketplace.
The ugly is that there was a small inversion in LIBOR a week or so ago. That's really bad, as LIBOR normally never inverts. As Ben has played his games of late the inversion disappeared from LIBOR but moved over into the intermediate area of the US Treasury Curve, where it is far more dangerous.
China, Japan and Saudi Arabia should bring the curtain down on this farce right damn now, because Treasuries are rapidly becoming no more secure than ordinary corporate debt and the buyers sure as hell aren't being compensated for that risk.
Treasury buyers are being robbed blind along with US investors who think they're "fleeing to safety."
Nonsense; as I showed yesterday the problem is that additional debt issue no longer renders much (if any) of a positive return on GDP - no matter who issues the debt - public or private.
The ugly little secret in that graph, if you study it a bit more, is what happens when interest rates spike higher. Go back and look specifically at the period surrounding 1980, when we had sky-high inflation. Notice that we didn't get back to trendline until bond rates came down - way down - as we started having supply absorbed by Japan, China and Saudi Arabia in the 1990s and into this decade.
There is a very real risk that this Treasury Issue could force GDP return on new debt below zero. If that happens then the stability of the monetary system disappears immediately and you will see instantaneous and very large fails in the Treasury marketplace.
The consequence of this event would be catastrophic. Ben would have only two choices - print raw money, which would immediately collapse the Treasury marketplace, or get Treasury and Congress to immediately reduce issue and spending to sustainable levels.
What would "sustainable levels" be? Given that issue is running $3 trillion year-on-year, this could result in an immediate and forced cut in all federal spending by fifty percent or more as the TARP and other program money will have been spent and cannot be recalled.
Yes, you read that right. Now go look at the Federal Budget and you will find that you could eliminate all discretionary programs and all of the military and not get there. This means that in order to attain stability we would have to immediately gut Medicare and Social Security by about 50%, cut our military budget dramatically, perhaps by 25% or more, and eliminate essentially all discretionary spending - all farm subsidies, the Department of Education, Unemployment Assistance and more.
Oh, and having done that, the long end of the curve would probably still spike to 10%, which means 13-14% mortgage rates. Cut the value of every house in America in half - again - from here.
The equity markets sense this. Not one equity trader in 1,000 understands it, but they all intuitively get that something is very wrong with what has been done recently, and that what's coming is going to be very bad - perhaps ruinously bad, especially in the corporate sector where corporate debt issue is a necessity to fund operations, and not just in the short-term commercial paper markets.
Running on free cash flow alone, most corporations would make 20% of what they make today - if that much. This, of course, collapses the "E" side of the balance sheet, which means that the "P" in P/E has to come down.
Way down.
Oh, and that assumes they can take down the debt without imploding, and many of these firms will not be able to do so.
If you were wondering where I got my S&P 500 target of 500 - or perhaps worse - this is part of the computation. Its not all of it by any means, but it certainly is part of it.
There is exactly one way to stop this idiocy, and that is for the bad debt that exists out there to be forced into default and thus cleared from the system. This will cause the debt to GDP level to come down. Clearing it back to the point where a 1:1 ratio or better exists between GDP and a dollar of debt may not be possible or reasonable, but if we don't stabilize this situation - and soon - we are running the risk of literally crossing the event horizon.
Congress must act now. The fuse is about to go inside the box and once it does, you can't snip it any more. It may, in fact, already done so.